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ACC510 Major Assignment (Task 2) [ATMC]

Semester (Trimester) 1 – 2017

Weighting: 30%

This assignment (task) requires you to prepare answers to the provided question. The assignment must be your own individual work that means it is not a group assignment. If it is believed that a student has copied material from another student or any other source without appropriate referencing, the necessary action will be taken in accordance with the University’s Student Academic Integrity – Governing Policy:

(http://www.usc.edu.au/explore/policies-and-procedures/student-academic-integrity-governing policy). Consequently, it is critical that you provide complete referencing for any and all sources of information that you use in preparing your answers to the assignment. This includes both in-text references and a list of references at the end of your assignment. Please, contact your local campus lecturer/tutor if you have any questions about referencing (APA 6thEdn. is to be used – it is available on MSWord). Alternatively, you can post your enquiry on the Discussion Board of the Blackboard site for this course.

Other general points about this assignment:

The assignment should only be submitted electronically via Safe Assignment on the ACC510 Blackboard site. If you wish to apply for an extension to your submission date, please email Dr Greg Laing (glaing@usc.edu.au) to explain the circumstances and attach any necessary supporting documentation.

Late penalties will be applied for assignments submitted after 12 midnight (24:00 hours) on Monday 12th June, 2017 without an approved extension. More details on late penalties are provided in the course outline.

It is not necessary to include an overall introduction and conclusion for the assignment.

Assessment Criteria:

The assignment will be marked according to the rubric and allocation list which encompasses aspects such as:

Logical application of concepts to situations, with adequate justification/support for choice made;

Professional presentation (word template provided), correct spelling, grammar and the use of the American Psychological Association (APA 6th) referencing method.

Question: (Approximately 600 words)

On 1st July, 2016, SC Airlines Ltd acquired a new aeroplane for a total cost of $10 million dollars. The following breakdown of the costs to build the aeroplane was given by the manufacturers.

Aircraft body

$3,000,000

Engines (2)

$4,000,000

Fitting out of aircraft:

Seats

$1,000,000

Carpets

$ 50,000

Electrical equipment:

Passenger seats

$ 200,000

Cockpit

$1,500,000

Food preparation equipment

$ 250,000

All costs include installation and labour costs associated with the relevant part.

It is expected that the aircraft will be kept for 10 years and then sold. The main value of the aircraft at that stage will be the body and the engines. The expected selling price is $2.1 million, with the body and engines retaining the existing proportionate value.

Costs in relation to the aircraft over the next 10 years are expected to be as follows:

Aircraft body: This requires an inspection every 2 years for cracks and wear and tear, at a cost of $10,000.

Engines: Each engine has an expected life of 4 years before being sold for scrap. It is expected that the engines will be replaced in 2020 for $4.5 million and again in 2024 for $6 million. These engines are expected to incur annual maintenance costs of $300,000. The manufacturer has informed SC Airlines that a new prototype engine with an extra 10% capacity should be on the market in 2022, and that existing engines could be upgraded at a cost of $1 million.

Fittings: Seats are replaced every 3 years. Expected replacement costs are $1.2 million in 2019 and $1.5 million in 2025. The repair of torn seats and faulty mechanisms is expected to cost $100,000 per annum. Carpets are replaced every 5 years. They will be replaced in 2022 at an expected cost of $65,000, but will not be replaced again before the aircraft is sold in 2026. Cleaning costs amount to $10,000 per annum. The electrical equipment (such as the TV) for each seat has an annual repair cost of $15,000. It is expected that, with the improvements in technology, the equipment will be totally replaced in 2022 by substantially better equipment at a cost of $350,000. The electrical equipment in the cockpit is tested frequently at an expected annual cost of $250,000. Major upgrades to the equipment are expected every 2 years at expected costs of $250,000 (in 2015), $300,000 (in 2017), $345,000 (in 2019), and $410,000 (in 2024). The upgrades will take into effect the expected changes in technology.

Food preparation equipment: This incurs annual costs for repair and maintenance of $20,000. The equipment is expected to be totally replaced in 2022.

Required:

Start by establish the issues for your analysis by addressing the following:

The advantages of a components approach versus a simple depreciation of the $10 million dollars over the 10-year period.

Since AASB 116 requires initial recognition at cost and then provides a choice between either the cost model (impairment) or the revaluation model (increment and/or decrement) – discuss the advantages and/or disadvantages in applying either model to the aeroplane as a whole – indicating which would be the most appropriate as a result or if treated as components then which would be most applicable to the components you have identified.

Basis for selecting the method of depreciation according to AASB 116.

Discuss how the costs relating to the aircraft should be accounted for (treated) with respect to:

Aircraft body;

Engines;

Fittings;

Food preparation equipment.

Where relevant consider/discuss issues such as:

The treatment of the upgrades of cockpit equipment.

Accounting for inspections.

Determine the expenses to be recognised for the financial year 1st July 2016 to 30th June 2017.

Answer.

Part 1.

a)The advantages of using the components approach versus a simple depreciation of the $10 million dollars over the 10-year period can be explained through the points below:-

The component approach of depreciation proves to be much advantageous. The component approach of the calculation of depreciation is a much easier and simple way of calculating depreciation. It is much easier to make practical applicability as compared 5to the simple depreciation method of the 10 million dollars over a period of 10 years.

The depreciation of the assets considered within this can be easily depreciated up to the final value of the net scrap (Hu, Percy & Yao, 2015).

This method gives enough chances for charging the same figure of depreciation from the final profit each year.

It is the best kind of approach for calculating the values of those assets whose expectancy of life is known and can be always correctly presumed.

b) The advantages of cost model of depreciation under AASB 116 are as follows:

Notably, the cost model does not take into consideration the actual changes that may arise from the change in the price level of an asset (Hu, Percy & Yao, 2015).

Cost model of accounting or as known as historical model of accounting usually tends to follow the conservatism principle and thereby, the lowest values of the assets are taken into consideration.

The advantages of the revaluation model of accounting are as follows:

Notably, this model of accounting tends to be more realistic in nature and tends to consider the market or the actual value of an asset.

This process of accounting takes into consideration the change in the level of price of an asset (Laing & Perrin, 2014).

c)

The revaluation model can be said to be the most beneficial approach for the business. Therefore, the business should make use of this model. The assets of the company are mainly valued as per the market rates. So being a company dealing in airline services, the company should adopt this model.

Part 2.

Aircraft body

The Cost of buying the air crafts $3,000,000 shall be treated as capital cost and treated in the Balance Sheet. The cost of inspection at $10,000 shall be treated as revenue costs and treated in Profit and Loss Account

Engines

The cost related to the purchase of two engines of the aeroplane shall cost $ 4,000,000, which shall be treated as capital costs and treated in the balance sheet of the company. The annual maintenance cost for the current year $300,000 shall be treated as revenue cost and recorded in the P/L Account.

Fittings

In case of the fittings, the cost borne for procuring seats shall be $1,000,000, which shall be treated as capital cost and recorded in the balance sheet. The cost borne for procuring the carpets for $50,000 shall be recorded in the Balance Sheet. These two costs shall be treated as the capital costs of the current financial year. However, the costs related to the repair of torn seats $ 100,000 shall be treated as revenue costs and recorded in the P/L account. Annual cleaning cost of $ 10,000 shall be treated as revenue costs and recorded in P/L account.

Electrical Equipments

The electrical equipments such as TV has an annual repair cost of $ 15000 and shall be recorded as Revenue costs and recorded in the Balance Sheet. The electrical equipments are tested frequently at a revenue cost of $ 250,000, which shall be included in the Balance Sheet. The costs of procuring passenger seats are $ 2,00,000 and the cost of procuring cockpit is $ 1,5000,000 which shall be treated as capital costs and recorded in the balance sheet of the current financial year.

Food preparation equipment

The cost of procuring the food preparation equipment at $ 250,000 shall be treated as capital costs and recorded in the balance sheet of the current financial year. The cost of repair incurs $ 20,000, which shall be treated in the P/L account as revenue costs.

Consideration of relevant issues

The total costs for carrying out with the up gradation of the cockpits consist of $ 2,50,000 over a period of 2 years (Laing & Perrin, 2014). So in 1 year, the cost of up-gradation can be termed to be $1,25,000 which shall be treated as capital cost and recorded in the balance sheet of the company.

The total cost spent for carrying out with the inspection activities amounts to $ 2,50,000 and it shall be also recorded as capital costs in the balance sheet of the company.

Part 3.

Aircraft body

The aircraft body including the cost of installation amounts to $ 3,000,000. Notably, it also includes the associated labor costs. It addition to that, it is noted that, the aircraft body needs inspection at an interval of 2 years that for repair and maintenance purpose and costs $ 10,000.

Thus, in regards to the given scenario, for the financial year 1st July 2016 to 30th June 2017, the expenses that is to be recognized amounts to $ 3,000,000.

Engines

Initially, the cost of the engines to the company amounts to $ 4,000,000. In addition to that, it is noted that, the engines requires an annual maintenance every year that will cost the company $ 300,000.

Hence, the total expenses that the company has to bear for the engines of the aircraft for the financial year 1st July 2016 to 30th June 2017 is = $ (4,000,000 + 300,000) = $ 4,300,000.

Fittings

The initial cost o the company for the fittings of the aircraft including the seats and the carpets amounts to $ 1,050,000 ($ 1,000,000 + $ 50,000). Additionally, the annual costs that need to be incurred for the fittings of the aircraft are listed below:

Initially, on 1 July 2017 the cost for the food preparation equipment amounts to $ 250,000. In addition to that, it is stated that, the company has to incur an annual cost of $ 20,000 for its repair and maintenance.

Therefore, the expenses that the company has to incur for the financial year 1 July 2016 to 30 June 2017 is = $ (250,000 + 20,000) = $ 270,000.

Total Expenses

The total expenses that SC Airlines Ltd has to incur annually for the financial year 1st July 2016 to 30th June 2017 in context to the new aircraft amounts to = $ (3,000,000 + 4,300,000 + 1,415,000 + 270,000) = $ 8,985,000

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